OPEC announced that it would cut production by 2.2 million barrels per day or 7%, in an effort to shore up the market. Is it working? We just need to look at the price of light sweet crude this morning, which is $33.06 -- down $3.00. Instead of raising the price of oil, it seems that the cuts have had little effect.
This is somewhat confusing, but there is a logical explanation. We have a glut of oil swishing all over the world. In fact, storage has become so tight that oil is now being stored in large tanker ships off shore. If we look at the forward contracts in light sweet crude we have what is call a contango. A contango is when the nearest contract is selling at a discount to more distant contracts. It translates into an excess of oil in the spot market. Until some of this excess oil is worked off the market, prices will tend to hover at these low levels.
Reader Comments (Page 1 of 1)
12-19-2008 @ 7:22PM
Kenny Isaacs said...
What goes around comes around we are getting ours now. They will get theirs again much to soon to suit me i'm sure.
12-19-2008 @ 10:24PM
RUSTY said...
FOR EVERY BARREL OF OIL OPEC CUTS THE REST OF THE WORLD WILL PRODUCE 2 BARRELS THAT IS WHY THE PRICE OF OIL IS SO LOW . CUT OPEC CUT PLEASE CUT 2.2 MIL BARRELS=4.4 MIL MORE BARRELS .AT THIS POINT WE ARE LOOKING AT 20 DOLLARS A BARREL AND 0.75 CENTS PER GALLON GAS CUT OPEC CUT :)
12-20-2008 @ 12:14AM
JCH said...
Why would an American producer produce more oil and sell you oil for $20 a barrel? I know our school system is producing some morons, but I would hope they aren't CEOs at American oil companies - or the Canadian oil companies.
The Russians are thinking about joining OPEC. If the Americans think the Canadians owe them $20 oil, the Canadians would be smart to do the same thing.
12-20-2008 @ 9:57AM
G.C. Edwards said...
What we should right now is buy as much oil as possible. If George Bush has a pair we should round up every tanker possible every storage tank and start buying crude oil,BUY BUY BUY!
12-20-2008 @ 10:12AM
Curtis said...
If OPEC really wanted to raise oil prices, they should lower the price of oil to new lows. After six months or so we Americans will go out and start buying big trucks and SUVs again and drive the price back up to $100.00 a barrel. That just our mentality.
12-20-2008 @ 8:00PM
william lindblad said...
Curtis makes a good and intuitive point. Since this has happened before there is little reason to expect some kind of miracle in which the publics habits change.
Plato said something about the mind being similar to a ball of wax. Impressions fade, sometimes quickly.
While the falling price of oil looks good, it could be a villain in disguise. We would all be better off if the price stabilized - albeit, at some reasonable price level. The current fall will have much the same outcome as the fall in housing prices as it will also take down many other economies. Net result will be less investment, much the same as being seen in the credit and banking markets.
While most would see the deflation that will be caused by the above in a favorable light, the massive inflation that will be at the end of the cycle will be another massive hurdle.
Anyone that wants to know the future in the U.S. - take a look at Iceland.
12-21-2008 @ 1:34AM
JCH said...
It can't stabilize because supply is much larger than demand.
In 2008 the oil producers were filling the largest demand for oil in the history of the earth. At the end of 2008 that demand is in free fall because we are in a severe recession (US conservation is a tiny part of the fall in demand). The oil producers have to cut down to wherever that demand finally lands. They have no choice.
If we truly are in a deflationary spiral, then the new $147 might end up being $37.
And the dolts will post that $147 was never real because we're only paying $40, and the oil producers will be making more money than they were at $147.
12-25-2008 @ 7:20PM
dennis said...
They are selling oil for gold and other metals and in some cases food and technology. Food and technology we have. The rest is suspect.